Oncology Venture - an unpolished diamant?

2019-04-23 09:51

A company full of triggers, with six clinical drug candidates

Some thoughts about OV and possible future scenarios

I begin by saying that I have invested a lot of time and money in this company. I tried to write this objectively and not build any castles made of sand. Rather, I’ve striven to give a thorough and true description of OV based on what we know and then fill some gaps with my own ideas and opinions. I hope to get some feedback, both positive and negative, from you so that we all interested in this fascinating and hopefully successful company can build a good picture of what is going on and what the future could look like.

Some achievements made

Since 2016 the company has made some great progress of which acquisition of assets like Dovitinib and PARP are quite astonishing. Further, the results in the still limited Liplacis study (response rate 30-40%) and Dovitinib, where 2-4 fold response rates were obtained, are results that points toward market approval. Especially the results of Dovitinib are strong as the study comprises of analyzing 2000+ biopsies giving the results all statistical significance needed. Further OV team has managed to build readiness to start several new studies with their candidates when the time is right. I believe that the technology behind DRP and PRP will give OV competitive advantage as the studies where it has been used already shows. Regardless the negative development of the stock price OV has actually made good progress when comparing to the generally quite “slowpaced” Pharma industry. With this said now could be the time to also change the direction of OV stock price?

(A detail about eg Dovitinb. Why would OV assets be worth less than others in the same category? Someone suggested that the reason would be that they are not developed by themselves. In my opinion that is not valid as assets acquired by eg Novartis and developed by eg Merck or some other company does not become worth less after the deal. OV BV approx. 25 M€ and deals made

with Dovitinib-like Sorafenib several billions USD and OV with Dovitinib + DRP = sorafenib response rate * 2)

What went wrong or not according to the plan?

Regardless of the excellent results the stock has just been going down. What went wrong? I have thought a lot about this and I have some ideas.

Firstly, the studies so far conducted in Denmark has been considerably slower than expected thus resulting in the still limited results. Secondly, the interest among investors to invest in OV has not been on the level expected including large sellings in the past years as a result of short-term investors. Thirdly, when the previously mentioned is combined with the fact that no deals have been made so far (due to some reasons we don’t know) there has been created a death spiral on its own. Big sellings -> reduced stock price -> less power to negotiate? -> no deals yet -> more sellings -> lower stock price -> lover pace of development -> less power to negotiate? -> more sellings -> less cash to be used for development and so forth ending up where we are, quite a big rights issue.

Some facts that strengthened this negative development: OV could not find enough long-term investors and some years ago when the discussion went hot on the investors from the US we can now probably conclude that these huge sellings where quite catastrophic for the development of OV´s stock price. This is of course just speculations but if the stock had gone up or stayed on a higher level OV could have made rights issues with considerably higher prices -> attracted more money -> conducted more studies faster -> a constant high stock price -> we would be one year (?) further in development with a considerably higher stock price and possible deals made that had further increased the pace.

Cadila. What´s really going on (or actually what’s not) and why? This has had a strong negative influence as it seems like OV is not controlling it. They should absolutely have cut the deal as they are already financing everything to show that they don’t need them. Or then clearly communicate if the plans has changed.

The late problems with financing. As already discussed the ABO deal was a big mistake. It is always easy to be wise on hindsight but that was a really expensive mistake for the current shareholders. The current rights issue, on the other hand, is a really clever way of doing the same but it´s we, current shareholders, who will benefit from possible future higher stock prices.

Some delays and lack of transparent communication. It is absolutely normal that companies in the same stage as OV faces delays especially in the pharma industry. The question here is how to handle it. OV chose poorly in my opinion as they did not inform us about problems or change of plans but rather just didn’t tell us anything. Of course they can´t tell us everything but they also just can´t leave a statement concerning “deals in 2018” etc like that and then say nothing. Hopefully we will see improvement on this section in the future. Another thing we still hadn´t heard of is the merged company´s strategy of any goal setting. That´s something investors hate.

But that´s history, what could the future look like?

As mentioned above getting financing /deals have been a lot more difficult/time consuming than expected. This has resulted in more capital needed from us shareholders and as the stock price have been, and is, what it is we are here now facing this rights issue resulting in extensive dilution. But! This does not mean the future looks the same or that the rights issue is bad for us shareholders.

I assume that the rights issue will bring in the required 100 MSEK. Further I believe, that the prospect will give details of the future development and timelines and one thing will be clear: the financing will be sufficient to take Liplacis “knocking on the door to market” if the options are used. Then the question is: how will the stock price rise with more than 100% from current level and with the dilution taken into account lift the value of OV by 4-fold? So here is what I think. (or at least things I have considered)

- In the near future it will be announced that Novartis uses its buy-back option in SPV2. This will give sufficient funding for development of that asset and possibly also to buy the 35% from S&L

- Dovitinib market approval without further trial or some other positive indication of how the 2500 biopsies and following good results can be used to reach the market. (ie not being forced to start from the beginning)

- Liplacis will receive breakthrough if the response rate will be like this. Even if the mgmt seems to have faced some problems with deals & financing this far they do now their technology which means Oncology, no doubt!

Have you btw thought why the Liplacis is valued according to 39% ownership?

As I see it there are actually two options 1) Cadila will be kicked out and OV ownership will rise to 69 % or 2) Cadila will pay for approx. 300 patients study (300MSEK or 1,5 fold current BV) meaning basically getting liplacis to the market in 2 different indications. Now the valuations is calculated as if Cadila would be able to keep their ownership without any contribution. (A funny detail!)

- OV will begin studies in Germany and the States increasing the pace significantly and also obtaining a lot of new publicity and investors.

- Further there is a good chance of moving to main list in the near future and therefore attract new investors. (Indication about listing on NYSE has been heard and there is actually already a ticker for Oncology Venture. This is also probably just for fun)

- Positive results from on-going studies in PARP and Irofulven. (In the last presentation stood that they will publish PARP results within 12 months after beginning the studies in mid June 2018. This is quite well positioned with the upcoming rights issue. Coincidence?)

- Deal? If we take a minute to analyze the financials we know that:

o OV has a net debt of 40 MSEK from before (I assume that they used all as they needed the bridge loan funding)

o OV take the bridge loan of 20 MSEK

o The rights issue will immediately give OV 100 MSEK and possibly 200 MSEK within the next 12 months

o From the 100 MSEK OV will use 60 to pay back the loan to Trenton thus the remaining cash at bank is 40 MSEK that actually will be spent quickly as the have a number of on-going studies

o My point being is that there is some near-term deal that will bring money to the company within say 2-6 months

o (Assumption: there will be no new rights issue this year which I think is quite reasonably thought)

- From the right issue it´s quite clear that OV believes that the share price and business value will develop positively from now on meaning there´s something else going on than just beginning new studies or results from on-going liplacis study. (We have seen that they wont result in significantly raising the stock price and the mgmt have seen the same)

- There has been a change in strategy due to difficulties or too low prices in out-licensing after phase 2 or proof-of-concept. I think OV will in the prospect or near future communicate that the aim is not necessarily to sell after phase2 but take the product to the market themselves. For us shareholders this means a bit more waiting and higher cost but a considerably larger share of the “pie”

- As said I think OV will receive full funding (approx.. 300 MSEK) meaning that in the next 1-2 years they will be able to treat approx. 200 patients (300 MSEK-loans-personal etc overhead costs = 300-60-40(?)= 200MSEK/1MSEK/ patient).

o This means that if they prioritize Liplacis it will get 100MSEK and the study in MBC will be almost ready and we now for sure if, how and when it will reach the market. If positive outcome this will be followed by a BV and share price considerably higher even with the dilution

- They will be able to conduct studies with approx. 100 patients outside the liplacis study thus getting the final needed proof-of-concept to convince the market. (If taking the same route to phase 3 as liplacis OV will have many phase 3 products within the next 2 years as well as many accelerated approval routes to market)

- The route to market will only require small studies compared to normal one´s and accelerated approval routes will be given to many of them. (This is something the market hasn´t realized yet.)

- At the moment where OV can show high enough efficacy in high enough number of patients and also financials to get to market I expect quite a rush of people who wants to get in

- DRP v 2 to anticipate side effects?

- Launching of PRP?

- There exist actually no limit how big OV can be… This is quite something

Different scenarios.. If the studies would be built in the same way as with liplacis in MBC around 25 patients would be required to get into phase 3. This means 100 patients would be sufficient to get 4 indications into phase 3. Now when the studies are conducted in the States and Germany there is probably a good chance that the recruiting is quite a lot faster as eg PARP already has IND/IDE in place. This could lead to getting into pivotal phase within or around 1 year.

So what are the risks here?

Financials: this of course is something we cannot be sure about. Have everything about deals and co-operation with Pharmas been just words? If we go back to the current financial situation we now that 60 MSEK of the 100 MSEK will basically go directly to pay back the loans. Further, OV is speeding up by starting faster (and therefore, more costly) studies and new ones as well. Are they doing this based on the remaining 40 MSEK? I doubt that even if fixing funding and deals have not been quite what many of us expected and hoped for. Also, if we consider the options with a strike price “OF AT LEAST” 7,5 SEK that gives to me the impression that some alternative funding (to raise BV and the stock price) or then outstanding development in other ways can be expected. But of course, it is always to be concidered as a risk in companies like OV. It is not impossible that the capital needed is more than expected and stock price development is worse than “expected”. On the other hand, if things start to move faster in the right direction it should result in a higher BV (and stock price) and therefore possible future fund raisings should lead to smaller dilution to attract the money required.

If we still continue a bit more with the funding is there a risk that there will be no deals within the next 2 years and the stock price will be below 7,5 SEK hence resulting in worthless options? Of course but is it likely? That´s up for everyone to consider themselves. However, wouldn’t you say that many things points towards a more positive scenario??

Results

Companies with the same valuation as OV around 20-30 M€ usually are either relying of early stage/preclinical results >5 years from the market or is relying on one product. Then OV? They have several studies validating DRP as a strong tool within precision medicine. Further OV is not relying on one, two or even tree but on 6 candidates and as communicated the number will be higher when adequate resources are in place. This doesn’t mean that all candidates will reach the market but some will and as mentioned before dovitinib has also a large enough sample to be statistically significant.

Schedules are always delayed in Pharma and OV is not an exception. If it will take 1,5 or 2,5 years to get through phase 2 it doesn´t actually make such a big difference. Looking at what we know of liplacis they plan to carry out a phase 3 in approx. 3 years. So from beginning of studies to market in around 5 years. That is phenomenal in pharma as those knowing anything about the industry can confirm. However, the problem here has been that the shareholders/investors have been given a too optimistic picture of the development and when delays are imminent no communication about this has been done. My point, the problem isn´t the delays but the lack of communication.

Competition

Precision medicine is developing fast and will at least in the future be a highly competed industry. But the market is a multi-multi billion USD market and as PBJ has said OV is well positioned in this game and is in the forefront. If you go and take a look at the most valuable oncology assets not many of them are yet precision medicine. This means that there exist a huge need and an just as big a market. Of course competition is something to take seriously and that is the reason why I personally think this big rights issue is positive even considering the dilution. Another aspect about the strength of DRP is that there isn´t actually a limit to the response rate that can be achieved. As been seen in the on-going phase 2 with lipacis the cut-off level can be changed in order to get higher response rates. Couldn´t this mean that with increased competition and higher response rates DRP can be used to treat a smaller population but still being competitive on the market? OV may well be a valuable partner for many Pharmas in the future and not just a competitor.

With this said I don´t encourage anyone to buy shares in OV without familiarizing oneself with the company. What I am saying is that things actually look quite positive at the moment and by just looking out of the rear-view mirror (or in this case the share price) you may be crushing in to a tree. I look forward to the beginning of the most interesting part of OV´s history so far and think it will be exciting times to be OV shareholder for the next 12 months to come.